This paper investigates the “cost of credit effect” of monetary policy on household consumption of final goods and services in South Africa, testing the hypotheses of the Keynesian interest rate channel of monetary policy transmission. We focus on three periods; post transition from apartheid, during inflation targeting and during the global financial crisis. Quarterly data from 1994Q1 to 2012Q4, constant parameter vector autoregressive techniques (VAR) by Sims (1980) and time varying parameter VAR by Primicieri (1995) are used in this study. The results show that household credit and consumption declined and stayed negative post transition and after inflation targeting - periods of monetary tightening in South Africa, but turned positive during the global financial crisis which saw passive or quasi expansionary monetary policy measures aimed at mitigating the negative output gap in South Africa. These changes in household credit and consumption across the different time periods show evidence of the cost of credit effect of monetary policy on household consumption in South Africa. They further reflect the impact of different structural changes and exogenous shocks on monetary policy conduct in South Africa and its pass through effect on household consumption in South Africa.
The impact of monetary policy on household consumption in South Africa. Evidence from Vector Autoregressive Techniques
Working paper 598